For most of us, when we buy or sell something, price is usually a big consideration in our decision-making process. However, the accompanying transaction costs inherent in making that sale or purchase may not always receive due deliberation.
This is as true for trading Forex as it is for selling a house or buying a car. When we trade Forex, one of the key transaction costs is, of course, the bid-offer spread.
For certain traders, it can be very useful to have the size of the spread displayed at a glance. This article is going to take a look at how to download an indicator for MetaTrader 4 that does precisely that.
The more experienced and successful a trader, the more cost-conscious they are. That is not to say there is necessarily any kind of causal relationship between the two. However, newer traders are often trying to juggle so many new concepts and pieces of information that the issue of trading cost gets little or no consideration.
It can help to get the size of spread front and foremost. Having this information labelled clearly right in front of your eyes is a way to ensure it stays in your thoughts.
So how can you do this?
The answer is, by using a spread indicator. With MetaTrader 4, it is easier than ever to download a spread indicator — and it's also very easy to use and understand.
Let's first take a look at how to download a spread indicator for MT4.
Perhaps the easiest way to access a spread indicator is to download MetaTrader 4 Supreme Edition. MT4SE is a free plugin that extends the functionality of MetaTrader 4, giving you a much wider choice of indicators, along with a number of other useful customisations.
Conveniently, a good spread indicator comes bundled as one of the many cutting-edge tools you gain when you download MetaTrader4 Supreme Edition.
The screenshot below shows the navigator window in MetaTrader4 after the installation of the MT4SE plugin:
As you can see, the MetaTrader spread indicator is just one of the many extra tools you gain as part of the comprehensive MT4SE Indicator Package.
Double-clicking on Admiral Spread Indicator brings up a dialogue window that allows you to configure some basic features. These allow you to personalise the look and feel of the indicator, altering such aspects as colour, font type and size, etc.
The current spread of the market is displayed on the main chart itself, in a default colour of red, as you can see in the screenshot above. I increased the font size and moved the spread display location by increasing the value of the Y coordinate.
Some markets tend to have a fixed spread, and clearly the indicator has no use in such cases. The usefulness of of the tool resides with instruments that have a variable spread.
The indicator works by measuring and instantly displaying the magnitude of the spread at any moment in time. It also records spread values while the indicator is open. This means when you are looking at a chart, you will be able to see previous pieces of information about the spread at a glance.
Notice that the spread history recorded in red and green for each candle below the main chart. The top of the red spikes show the largest spread recorded for each candle. The bottom of the green spikes show the lowest spread recorded for each candle. This can assist your trading decisions.
Different traders are cost-sensitive to different degrees. How cost-sensitive you need to be really depends on the type of strategy you are using. The shorter your trading style and the more frequently you are trading, the more conscious you are going to have to be of the size of the spread.
If you are a long-term trader looking to make a lot of pips over a period of weeks or even months, then the size of the spread becomes less crucial. But if you are a day trader or a scalper, the size of the spread may make all the difference between a profit and a loss.
If you are in and out of the market a lot, the transaction costs are eventually going to add up. If this is the way you trade, you need to ensure you are trading at those time when spread is optimal.
It's a generally good idea to combine indicators, using one or more supplementary tools to confirm the findings of your main indicator. A spread indicator can be used as a final filtering tweak to ensure you aren't dealing at a sub-optimal time.
Note, this may not be useful for everyone: if you are using a strategy that trades very infrequently, you are unlikely to want to add another filter that excludes trades when the spread is larger than normal. If you have a high frequency strategy that aims to make only a few pips profit, however, it may be vitally important to avoid trading at times when the spread is wider than normal.
For example, let's say that having downloaded MetaTrader 4 Supreme Edition, you decide to use the Admiral Keltner indicator as your primary way of generating trading signals. The Keltner Channel Indicator plots trading bands on your chart that help to identify support and resistance.
You might be using a short-term countertrading strategy, looking at an hourly chart and selling if the market reaches the upper band or buying if it falls to the lower band. You then might apply a filter to improve the performance of this first indicator.
Let's say you look at a 100-period moving average and a 25-period moving average and use them to define the overall trend. If the faster moving average was below the longer one, it might indicate a downward trend. If it was above, it might indicate an upward trend.
You would then only trade on your primary signal when it agrees with the direction of the overall trend. So this filter would only allow sells if the faster moving average was below the longer moving average, or buy if it was above.
As a final filter, you might use the spread indicator. You can see in the spread history where the spikes occur that indicate higher than normal spread ranges. This would allow you to avoid trading when the spread is in these upper ranges. Instead, you would try to trade when the spread is at an average or below-average level.
Obviously, the above example is more about illustrating the point than giving an actual trading method. Before adopting any strategy, you should always try it out first in a risk-free environment, such as our demo trading account.
Many indicators can be used to generate trading signals. A spread indicator does not work like this, but it can be a useful tool for helping you to evaluate if conditions are favourable. As we have discussed, it allows you to see at a glance how wide the current bid/offer spread is and how that compares to previous spread magnitudes.
It is, therefore, useful as a kind of filter, primarily for trading strategies that are high frequency and where you are only looking to capture a few points of profit. We hope you find it a beneficial accessory to your trading.